Compare and Contrast Essay on Cournot Ltd and Bertrand Ltd: Price War

What Price Will Each Charge?

Cournot Ltd and Bertrand Ltd will charge 10 each which is the highest price and can guarantee moderate profits for both the organizations.

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Rationale

Cournot Ltd and Bertrand Ltd are competitors selling substituting products. In such a market situation, it is not possible for Cournot Ltd and Bertrand Ltd to use product differentiation to acquire a competitive advantage and they have to negotiate for a moderate profit using the highest price. Charging 10 by both the organizations ensures that both the organizations can be able to make moderate profits a point at which both the organizations makes a profit and remain sustainable in the market. At 10, 10 which is the price for moderate profits will ensure that both the organizations to remain competitive because they are making a profit. The price is at a win-win situation which is ideal for any business and the gains are equally shared and feasible (Heil & Helsen, 2001).

Can the Players Somehow Achieve Legal Cooperation and Overcome Conflict?

Cooperation is the process through which business organizations come together to share technology or a common market. Cooperation is an important approach for businesses that do not to compete directly with each other. Competition is expensive and can drive businesses from the market especially where price competition is involved in a situation where businesses have substitute products. Legal cooperation results in a monopoly which is not good for the market especially because Cournot Ltd and Bertrand Ltd can collude to exploit the consumers. However, cooperation can help Cournot Ltd and Bertrand Ltd to reduce their overall cost by reducing their marketing cost. However, cooperation weakens one of the businesses and reduces the ability of the organizations to make products based on the best interest of the consumers while prices can be increased to exploit the consumers (Dai, 2008).

What Changes if the Game Is Played Repeatedly?

Continuous competition means that both Cournot Ltd and Bertrand Ltd will keep on changing their market strategies especially the product price to increase their competitive advantage. Both Cournot Ltd and Bertrand Ltd will keep on changing their prices with every organization seeking to sell their product at the lowest price. Continuous competition using the prices makes the value of the products go down and the reduced prices make it impossible for both the organizations to sustain their profits. Cournot Ltd and Bertrand Ltd repeated competition by reducing the prices damages both the organizations and increases their cost while reducing the profits.

What Will Happen in Terms of Profits if Each Firm Threatens the Other With a Price War?

A price war is detrimental to the profitability of Cournot Ltd and Bertrand Ltd because the businesses will be more focused on creating a competitive advantage using their product price. A price war refers to a market supremacy competition through which businesses in the market compete to offer their products at the lowest possible price an approach that seeks to increase a business profitability by increasing their overall market share. Price wars require a business to achieve cost leadership which makes it possible for the business to adjust the product prices with the aim of gaining more market share (Heil & Helsen, 2001). However, competitive price wars are not conducive because they increase the cost doing business and reduce the overall profit for both the businesses because the price is reduced in price wars. In the short term, a business uses price war strategy to increase its revenues while in the long term it can increase its market share. The major problem in using price war to compete especially in the case of Cournot Ltd and Bertrand Ltd where the products are substitutes is that both the competing companies lose their overall profit (Fabra & Toro, 2005).

Conclusion

In the competitive business environment, Cournot Ltd and Bertrand Ltd cannot continue to engage in price wars because of its negative impact on the profits of both the organizations. Therefore, Cournot Ltd and Bertrand Ltd can cooperate with the aim of promoting profit sustainability. Deregulation which has made it easy for businesses to easily access technology and resources reduces the ability of any single organization to attain high profits unchallenged by other businesses. This challenge of price wars and business competition that erodes business competitive advantage quickly is through cooperation. Cooperation will allow Cournot Ltd and Bertrand Ltd to sustain their profits in the longterm and offer market leadership for both the organizations. Business organizations that share a lot in common have the highest incentive to cooperate and Cournot Ltd and Bertrand Ltd will be forced to cooperate due to their product similarity as well as the fact that they share a common market. Cooperation can only occur when businesses are sharing a common market, selling a common product and also are faced with similar challenges to sustain their profits. However, because the market regulates itself many businesses are not able to sustain any cooperation for long and at the end, they result in price competition and product differentiation to seek a competitive advantage (Dai, 2008).

References

Dai, L. (2008, January). Maximizing cooperation in a competitive environment. In Competition Forum (Vol. 6, No. 1, p. 63). American Society for Competitiveness.

Fabra, N., & Toro, J. (2005). Price wars and collusion in the Spanish electricity market. International Journal of Industrial Organization, 23(3-4), 155-181.

Heil, O. P., & Helsen, K. (2001). Toward an understanding of price wars: Their nature and how they erupt. International Journal of Research in Marketing, 18(1-2), 83-98.